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Malaysian Banking Law: Definition of Banker, Banking Business and Customer
Introduction
Banking law is fundamentally concerned with regulating the legal relationship between financial institutions and the persons who deal with them. In modern society, banks play an essential role in trade, commerce, investment, economic development, and the circulation of money. As a result, banking law has developed into a specialised branch of commercial law governing matters such as deposits, loans, payment systems, negotiable instruments, financing arrangements, banker–customer relationships, confidentiality obligations, and financial regulation.
Traditionally, banks were primarily involved in receiving deposits, honouring cheques, and granting loans. However, the modern banking industry has evolved significantly. Today, banks engage in a wide range of activities including internet banking, mobile and digital payments, credit and charge cards, foreign exchange transactions, investment banking, Islamic finance, trade financing, insurance services, and financial advisory services. Because of this evolution, defining the terms “bank,” “banker,” “banking business,” and “customer” has become increasingly difficult.
The courts and legislatures have therefore adopted flexible approaches when interpreting banking law. Rather than relying solely on rigid definitions, the law examines the substance, functions, and nature of the relationship between the parties.
Definition of a Banker at Common Law
At common law, there is no exhaustive or universally accepted definition of the word “banker” or “bank.” The courts have repeatedly recognised that banking is a dynamic commercial activity that changes according to economic conditions, technology, and social practices.
In Bank of Chettinad Ltd of Colombo v IT Commissioners of Colombo, the Privy Council observed that the words “bank” and “banking” may carry different meanings depending on the historical period and the economic development of a country. The court acknowledged that banking practices differ across jurisdictions and therefore cannot be confined within a narrow legal formula.
Similarly, in Bank of New South Wales v Commonwealth, Dixon J emphasised that banking should be given a broad meaning because it forms part of the commercial, economic, and social organisation of society. His Lordship further stated that it is impossible to formulate a completely inclusive definition of banking because banking practices evolve continuously.
These decisions establish an important principle: banking law must remain flexible to accommodate changes in commerce and financial technology. The legal meaning of a banker cannot be frozen in time.
Traditional Characteristics of Banking
Historically, courts identified certain characteristics commonly associated with banking.
In State Savings Bank of Victoria, Commissioners v Permewan, Wright & Co Ltd, Isaac J described the essential business of banking as:
Later, in United Dominions Trust Ltd v Kirkwood, the Court of Appeal identified three traditional characteristics of banking:
Thus, common law does not impose a rigid checklist but instead adopts a functional and practical approach.
Modern Banking and the Decline of Traditional Cheque-Based Banking
Modern banking has moved far beyond traditional cheque-based transactions. Electronic fund transfers, online banking, digital wallets, QR payments, and mobile banking have replaced many traditional cheque functions.
This evolution caused courts to reconsider whether cheque handling is truly essential to banking. In R v Industrial Disputes Tribunal, ex parte East Anglian Trustee Savings Bank, the court held that an institution could still be regarded as a bank even though it did not issue cheque books to customers.
Other cases such as Re Bottomgate Industrial Co-operative Society and State Savings Bank of Victoria, Commissioners v Permewan, Wright & Co Ltd also supported the view that cheque services are not absolutely essential.
The modern legal approach therefore focuses on the broader financial intermediation function of banking rather than specific traditional methods.
Statutory Definition under Malaysian Law
Under the Financial Services Act 2013 (“FSA 2013”), there is no direct statutory definition of the word “bank.” Instead, the legislation defines:
The same section defines “banking business” as:
Importantly, Malaysian courts interpret these requirements conjunctively rather than disjunctively. This means the elements of banking business must be viewed collectively as part of a continuous financial system.
In Light Style Sdn Bhd v KFH Ijarah House (Malaysia) Sdn Bhd, the court held that merely providing financing does not amount to banking business because the institution did not perform other core banking functions such as accepting deposits or handling payment accounts.
The court stressed that banking business is not established by isolated activities alone. Instead, there must exist a substantial and integrated banking operation.
Activities That Do Not Amount to Banking Business
The courts consistently distinguish between true banking business and incidental financial activities.
In Bank of China v Lee Kee Pin, the court held that taking legal proceedings to recover debts does not amount to carrying on banking business. The bank was merely winding up existing transactions rather than conducting ongoing banking operations.
Similarly, in Koh Kim Chai v Asia Commercial Banking Corporation Limited, the Privy Council ruled that taking security over land in Malaysia and enforcing that security did not constitute banking business in Malaysia.
The court emphasised that:
Similarly, Sabah Development Bank Bhd v SKBS (Sabah) Sdn Bhd established that development finance institutions are not necessarily banks merely because they provide financing facilities.
These decisions collectively demonstrate that not every financial institution or lender is legally considered a banker.
Development Finance Institutions and Banking
Development finance institutions (“DFIs”) occupy a special position within the financial system. Their primary role is to promote economic development through medium-term and long-term financing.
In Bank Industri (M) Bhd v Technopro Corp (M) Bhd, the court recognised that development finance institutions are specialised financial institutions authorised to support industrial, agricultural, and commercial development.
Although such institutions provide financing and loans, they are not necessarily banks because they may not perform all core banking functions such as deposit-taking and payment handling.
This distinction is important because Malaysian law recognises that financial intermediation may occur outside traditional commercial banking structures.
Section 125 BAFIA and Preservation of Contracts
Section 125 of the repealed Banking and Financial Institutions Act 1989 (“BAFIA”) provided that contracts entered into in contravention of the Act are not automatically void unless expressly declared so by legislation.
In Light Style Sdn Bhd v KFH Ijarah House (Malaysia) Sdn Bhd, the court held that even if there had been a technical breach of BAFIA, the financing agreement would remain enforceable because section 125 preserved the validity of the contract.
This principle reflects the policy of preserving commercial certainty and preventing borrowers from escaping repayment obligations merely by alleging regulatory non-compliance.
The same approach continues under the Financial Services Act 2013, where regulatory breaches are generally addressed through enforcement actions rather than automatic invalidation of contracts.
Definition of “Customer”
Unlike the word “banker,” the term “customer” is not statutorily defined under either Malaysian or English banking legislation.
The following statutes do not define the term:
This broader and functional definition influenced judicial thinking regarding banker–customer relationships.
Judicial Principles Governing Banker–Customer Relationship
The existence of a banker–customer relationship depends on mutual intention.
In Robinson v Midland Bank Ltd, the court held that no banker–customer relationship exists unless both parties intend to create one.
In Great Western Railway Co v London and County Banking Co Ltd, a man who regularly cashed cheques at a bank without maintaining an account was held not to be a customer. Lord Davey stated that some form of account or similar banking relationship is necessary.
However, the law later evolved. In Commissioners of Taxation v English, Scottish and Australian Bank Ltd, the House of Lords held that duration is not essential. A person becomes a customer immediately once the bank accepts money and establishes an account relationship, even if the relationship is brief or involves a single cheque transaction.
Thus, the decisive factor is not the length of the relationship but the existence of a genuine banking relationship.
Casual Services
The courts distinguish between a genuine customer relationship and a casual service.
A casual service refers to isolated or occasional assistance provided by a bank without establishing a continuing banking relationship. Examples include:
Formation of Banker–Customer Relationship Through Negotiations
The banker–customer relationship may begin even before a formal contract is executed.
In Abdul Rahim Abdul Hamid v Perdana Merchant Bankers Bhd, the Court of Appeal held that a banker–customer relationship can arise once negotiations become part of the process leading directly to an agreement.
Where draft agreements, negotiations, and intended contractual terms exist, legal duties may arise even before the final agreement is signed.
This modern approach recognises the commercial realities of banking transactions.
Modern Concept of a Banker
Today, the banker is best understood as:
Consequently, the modern legal definition of a banker focuses on the substance of financial intermediation rather than rigid traditional formalities.
Conclusion
The concepts of banker, banking business, and customer have evolved considerably through judicial interpretation and statutory development. Modern banking law adopts a flexible and functional approach that reflects contemporary financial realities.
A banker is essentially a licensed financial institution carrying on a substantial and continuous banking system involving deposit-taking, payment services, and financing activities. Banking business requires a combination of integrated functions rather than isolated financial acts such as lending or debt recovery.
Similarly, a customer relationship depends on the existence of a genuine banking relationship based on mutual intention and account-based dealings rather than duration alone.
These principles collectively ensure that banking law remains commercially practical, legally coherent, and adaptable to the changing financial environment.
Introduction
Banking law is fundamentally concerned with regulating the legal relationship between financial institutions and the persons who deal with them. In modern society, banks play an essential role in trade, commerce, investment, economic development, and the circulation of money. As a result, banking law has developed into a specialised branch of commercial law governing matters such as deposits, loans, payment systems, negotiable instruments, financing arrangements, banker–customer relationships, confidentiality obligations, and financial regulation.
Traditionally, banks were primarily involved in receiving deposits, honouring cheques, and granting loans. However, the modern banking industry has evolved significantly. Today, banks engage in a wide range of activities including internet banking, mobile and digital payments, credit and charge cards, foreign exchange transactions, investment banking, Islamic finance, trade financing, insurance services, and financial advisory services. Because of this evolution, defining the terms “bank,” “banker,” “banking business,” and “customer” has become increasingly difficult.
The courts and legislatures have therefore adopted flexible approaches when interpreting banking law. Rather than relying solely on rigid definitions, the law examines the substance, functions, and nature of the relationship between the parties.
Definition of a Banker at Common Law
At common law, there is no exhaustive or universally accepted definition of the word “banker” or “bank.” The courts have repeatedly recognised that banking is a dynamic commercial activity that changes according to economic conditions, technology, and social practices.
In Bank of Chettinad Ltd of Colombo v IT Commissioners of Colombo, the Privy Council observed that the words “bank” and “banking” may carry different meanings depending on the historical period and the economic development of a country. The court acknowledged that banking practices differ across jurisdictions and therefore cannot be confined within a narrow legal formula.
Similarly, in Bank of New South Wales v Commonwealth, Dixon J emphasised that banking should be given a broad meaning because it forms part of the commercial, economic, and social organisation of society. His Lordship further stated that it is impossible to formulate a completely inclusive definition of banking because banking practices evolve continuously.
These decisions establish an important principle: banking law must remain flexible to accommodate changes in commerce and financial technology. The legal meaning of a banker cannot be frozen in time.
Traditional Characteristics of Banking
Historically, courts identified certain characteristics commonly associated with banking.
In State Savings Bank of Victoria, Commissioners v Permewan, Wright & Co Ltd, Isaac J described the essential business of banking as:
- collecting money through deposits;
- holding those deposits repayable upon demand or agreement; and
- utilising the funds by lending or financing activities.
Later, in United Dominions Trust Ltd v Kirkwood, the Court of Appeal identified three traditional characteristics of banking:
- The maintenance of current accounts;
- The payment of cheques drawn by customers; and
- The collection of cheques for customers.
Thus, common law does not impose a rigid checklist but instead adopts a functional and practical approach.
Modern Banking and the Decline of Traditional Cheque-Based Banking
Modern banking has moved far beyond traditional cheque-based transactions. Electronic fund transfers, online banking, digital wallets, QR payments, and mobile banking have replaced many traditional cheque functions.
This evolution caused courts to reconsider whether cheque handling is truly essential to banking. In R v Industrial Disputes Tribunal, ex parte East Anglian Trustee Savings Bank, the court held that an institution could still be regarded as a bank even though it did not issue cheque books to customers.
Other cases such as Re Bottomgate Industrial Co-operative Society and State Savings Bank of Victoria, Commissioners v Permewan, Wright & Co Ltd also supported the view that cheque services are not absolutely essential.
The modern legal approach therefore focuses on the broader financial intermediation function of banking rather than specific traditional methods.
Statutory Definition under Malaysian Law
Under the Financial Services Act 2013 (“FSA 2013”), there is no direct statutory definition of the word “bank.” Instead, the legislation defines:
- “licensed bank”; and
- “banking business.”
The same section defines “banking business” as:
- accepting deposits;
- paying and collecting cheques or payment instructions;
- providing finance; and
- any prescribed banking activity.
Importantly, Malaysian courts interpret these requirements conjunctively rather than disjunctively. This means the elements of banking business must be viewed collectively as part of a continuous financial system.
In Light Style Sdn Bhd v KFH Ijarah House (Malaysia) Sdn Bhd, the court held that merely providing financing does not amount to banking business because the institution did not perform other core banking functions such as accepting deposits or handling payment accounts.
The court stressed that banking business is not established by isolated activities alone. Instead, there must exist a substantial and integrated banking operation.
Activities That Do Not Amount to Banking Business
The courts consistently distinguish between true banking business and incidental financial activities.
In Bank of China v Lee Kee Pin, the court held that taking legal proceedings to recover debts does not amount to carrying on banking business. The bank was merely winding up existing transactions rather than conducting ongoing banking operations.
Similarly, in Koh Kim Chai v Asia Commercial Banking Corporation Limited, the Privy Council ruled that taking security over land in Malaysia and enforcing that security did not constitute banking business in Malaysia.
The court emphasised that:
- taking security;
- enforcing guarantees; and
- debt recovery
are merely incidental or ancillary activities rather than the essence of banking.
Similarly, Sabah Development Bank Bhd v SKBS (Sabah) Sdn Bhd established that development finance institutions are not necessarily banks merely because they provide financing facilities.
These decisions collectively demonstrate that not every financial institution or lender is legally considered a banker.
Development Finance Institutions and Banking
Development finance institutions (“DFIs”) occupy a special position within the financial system. Their primary role is to promote economic development through medium-term and long-term financing.
In Bank Industri (M) Bhd v Technopro Corp (M) Bhd, the court recognised that development finance institutions are specialised financial institutions authorised to support industrial, agricultural, and commercial development.
Although such institutions provide financing and loans, they are not necessarily banks because they may not perform all core banking functions such as deposit-taking and payment handling.
This distinction is important because Malaysian law recognises that financial intermediation may occur outside traditional commercial banking structures.
Section 125 BAFIA and Preservation of Contracts
Section 125 of the repealed Banking and Financial Institutions Act 1989 (“BAFIA”) provided that contracts entered into in contravention of the Act are not automatically void unless expressly declared so by legislation.
In Light Style Sdn Bhd v KFH Ijarah House (Malaysia) Sdn Bhd, the court held that even if there had been a technical breach of BAFIA, the financing agreement would remain enforceable because section 125 preserved the validity of the contract.
This principle reflects the policy of preserving commercial certainty and preventing borrowers from escaping repayment obligations merely by alleging regulatory non-compliance.
The same approach continues under the Financial Services Act 2013, where regulatory breaches are generally addressed through enforcement actions rather than automatic invalidation of contracts.
Definition of “Customer”
Unlike the word “banker,” the term “customer” is not statutorily defined under either Malaysian or English banking legislation.
The following statutes do not define the term:
- Bills of Exchange Act 1882;
- Bills of Exchange Act 1949;
- Financial Services Act 2013.
This broader and functional definition influenced judicial thinking regarding banker–customer relationships.
Judicial Principles Governing Banker–Customer Relationship
The existence of a banker–customer relationship depends on mutual intention.
In Robinson v Midland Bank Ltd, the court held that no banker–customer relationship exists unless both parties intend to create one.
In Great Western Railway Co v London and County Banking Co Ltd, a man who regularly cashed cheques at a bank without maintaining an account was held not to be a customer. Lord Davey stated that some form of account or similar banking relationship is necessary.
However, the law later evolved. In Commissioners of Taxation v English, Scottish and Australian Bank Ltd, the House of Lords held that duration is not essential. A person becomes a customer immediately once the bank accepts money and establishes an account relationship, even if the relationship is brief or involves a single cheque transaction.
Thus, the decisive factor is not the length of the relationship but the existence of a genuine banking relationship.
Casual Services
The courts distinguish between a genuine customer relationship and a casual service.
A casual service refers to isolated or occasional assistance provided by a bank without establishing a continuing banking relationship. Examples include:
- cashing cheques for non-customers;
- providing one-time assistance; or
- exchanging cheques for cash.
Formation of Banker–Customer Relationship Through Negotiations
The banker–customer relationship may begin even before a formal contract is executed.
In Abdul Rahim Abdul Hamid v Perdana Merchant Bankers Bhd, the Court of Appeal held that a banker–customer relationship can arise once negotiations become part of the process leading directly to an agreement.
Where draft agreements, negotiations, and intended contractual terms exist, legal duties may arise even before the final agreement is signed.
This modern approach recognises the commercial realities of banking transactions.
Modern Concept of a Banker
Today, the banker is best understood as:
- a regulated financial intermediary;
- a deposit-taking institution;
- a provider of financial services; and
- an entity authorised to carry on banking business.
Consequently, the modern legal definition of a banker focuses on the substance of financial intermediation rather than rigid traditional formalities.
Conclusion
The concepts of banker, banking business, and customer have evolved considerably through judicial interpretation and statutory development. Modern banking law adopts a flexible and functional approach that reflects contemporary financial realities.
A banker is essentially a licensed financial institution carrying on a substantial and continuous banking system involving deposit-taking, payment services, and financing activities. Banking business requires a combination of integrated functions rather than isolated financial acts such as lending or debt recovery.
Similarly, a customer relationship depends on the existence of a genuine banking relationship based on mutual intention and account-based dealings rather than duration alone.
These principles collectively ensure that banking law remains commercially practical, legally coherent, and adaptable to the changing financial environment.
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